Banks’ Dollar Funding Costs Rise to 8-Week High as Economy Slows

By Katie Linsell -
Jun 1, 2012

The cost for European banks to borrow
in dollars rose to the highest in more than a month after data
showed Chinese manufacturing slowed and European output shrank.

The three-month cross-currency basis swap, the rate banks
pay to convert euro interest payments into dollars, was 56 basis
points below the euro interbank offered rate at 12:46 p.m. in
London from minus 50 yesterday, according to data compiled by
Bloomberg. That’s the most expensive level since April 10.

As Europe’s two-year debt crisis threatens to engulf Spain
and spread abroad by undermining demand and investor confidence,
signs of a renewed international slowdown are mounting. A gauge
of manufacturing in the 17-nation euro zone fell to a three-year
low of 45.1 in May, indicating a 10th month of contraction,
while unemployment reached 11 percent, the highest on record.

“We have seen further evidence of a weakening global
economy, notably in Chinese and European manufacturing data,”
said Chris Clark, an interest-rate strategist at ICAP Plc in
London. “Euro-dollar basis prices continue to imply a
tightening in dollar funding constraints for the euro zone’s
financial sector.”

The one-year basis swap was little changed at 68 basis
points below Euribor. A basis point is 0.01 percentage point.

Short-term bank funding rates exceeded longer-term costs in
the market for borrowing and lending European government bonds,
the so-called repo market. The difference between the one-day
euro repurchase agreement and three-month repo rates was little
changed at 3.7 basis points, near the widest in three months,
European Banking Federation data show.

No Strain

“There is little evidence of real strain in the market
which is actually in the process of lowering the volume of
dollars it sources through the European Central Bank’s dollar
swap facility,” said Clark.

Two banks bid for $500 million in seven-day loans from the
ECB on May 30 at a cost of 66 basis points, compared with six
banks that got $2.9 billion in loans of the same duration at 63
basis points on March 28, according to the central bank’s data.
The Federal Reserve’s swap lines through the central bank offer
Europe’s lenders seven-day and three-month loans at low interest
rates.

Prices in the forward market for three-month Euribor
relative to overnight indexed swaps -- known as the FRA/OIS
spread -- was 32.5 basis points from 32 yesterday. An increase
signals banks are more reluctant to lend.